Harvard: Lessons From The Biggest Business Tax Cut In U.S. History

Harvard Gazette, Raise Corporate Tax Rates! No, Cut Them! Maybe Take a Look First?:

Congress is spoiling for a tax battle in 2025.

Key parts of the 2017 Tax Cuts and Jobs Act are set to expire. Most urgent to many voters are sunsetting provisions aimed at households, including the more generous Child Tax Credit. But renewing the law’s deep cuts to corporate taxes are also up for debate. Republicans and Democrats have seized on the issues in campaign speeches, with Kamala Harris endorsing a higher top corporate rate to pay for other initiatives and Donald Trump arguing that lowering rates further will foster growth.

In a new analysis of the TCJA, published last month in the Journal of Economic Perspectives [Lessons from the Biggest Business Tax Cut in US History], Harvard macroeconomist Gabriel Chodorow-Reich charts the real-world impacts of the 2017 law’s various corporate tax cuts. His paper, co-written with Princeton’s Owen M. Zidar and the University of Chicago’s Eric Zwick, M.A. ’12, Ph.D. ’14, describes modest increases in wages and business investments, with some expired and expiring provisions proving most cost-effective. But these gains were hardly large enough to offset the big hit to tax revenue.

Chodorow-Reich hopes the findings challenge partisan narratives and inspire smarter solutions. “People may look at what happened with corporate income and say, ‘Hey, look! Tax cuts pay for themselves through higher investment!’” Chodorow-Reich said. “But that’s just not what we see in the data. Others may want to raise corporate taxes, because they think taxes have no effect on corporate policy. But that’s not what we see in the data, either.” ...

The Journal of Economic Perspectives devoted much of its summer issue to assessing the TCJA, with Chodorow et al. focusing on its corporate provisions. Reviewing a range of evidence — from studies of individual corporate tax returns to an original macroeconomic analysis outlined in a companion paper [Tax Policy and Investment in a Global Economy] — led them to conclude that capital investments had, in fact, increased under the law by about 11 percent.

“That means we learned something,” offered Chodorow-Reich, citing a recent poll that found economists split on whether the law actually drove business investments. “Firms definitely do respond to corporate tax policy.”

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